Six clients of registered futures commission merchants have already cleared over-the-counter rate trades in a variety of maturities and currencies.
NYSE Liffe and CME Group are both gearing up to offer investors IRS clearing through similar models – with the potential advantage of cross-margining for their existing futures clearing members.
Twelve FCMs are connected to SwapClear : Bank of America Merrill Lynch, Barclays Capital, BNP Paribas, Citigroup, Credit Suisse, Deutsche Bank, Goldman Sachs, JP Morgan, Morgan Stanley, Nomura Securities, Royal Bank of Scotland and UBS. HSBC’s US securities subsidiary is due to join.
The member banks are part of OTCDerivnet, a limited liability partnership owned by SwapClear’s largest clearing members. Historically, this has given the big banks a strong incentive to clear through LCH – though the same will not necessarily hold for their buyside clients.
Though many in the market have predicted a big increase in business for clearing houses as a result of the Dodd-Frank Act, SwapClear CEO Michael Davie told FOW’s news service FOi in October that cross-margining would not necessarily be a game-changer for the established US futures exchanges.
The Commodity Futures Trading Commission will from this summer regulate the mandated clearing of all standardised swaps not deemed necessary for hedging. But Davie told FOi: “We’ve been offering client clearing for a year now. We’ve got clients live on the service. But the reality is that it will take time for the buy side to adapt to clearing.”
Long pedigree
SwapClear has cleared some 1.5m OTC trades since launching 11 years ago, and clears some 40% of the global interest rate swap market. It also handled Lehman Brothers’ $9tr IRS default in September 2008.
Its FCM service offers US clients portability of client collateral and positions and initial margin collateral held solely in the US. SwapClear covers over 90% of the vanilla IRS market, and will be expanded later this year to cover dollar-denominated amortising swaps.
LCH has been working on SwapClear’s FCM model since last summer, with the operational framework in place by the fourth quarter of 2010. The firm’s legal framework gained CFTC approval earlier this year.
SwapClear's first significant buy side client, already in place last year, was MPS Capital Services, which clears through BarCap. Under the terms of the deal, BarCap serves as the primary clearing broker for MPS’s IRS transactions. The agreement also included the backloading of a significant portion of MPS’s past trades.
Commenting on the launch, Floyd Converse, head of US sales and marketing for the firm, said: “Features such as flexible payment dates, flexible Libor indices, OIS discounting and 14 currencies are not matched by another clearer. These are available within the protections of an FCM framework; regulated by the CFTC and subject to US law. We will continue to develop and strengthen products and services to US clients as client clearing evolves.”